Mortgage slump signals rate peak

SPECULATION that interest rates have peaked was fuelled today by news of a sharp slowdown in mortgage demand and dovish comments from the Bank of England's monetary policy committee (MPC).

The Building Societies Association (BSA) said mortgage approvals - loans agreed but not yet made - totalled £2.8bn in September, a three-year low.

That compares with £3.6bn in August and £5.2bn a year ago when the boom was in full swing.

As the first stage of the home-buying process, approvals are a key guide to future market direction.

Net mortgage advances by building societies were also down last month at £1.4bn, from August's £2bn.

Adrian Coles, director-general of the BSA, said: 'This month there is further evidence of a slowdown in the housing market and recent interest rate rises are starting to take effect. We should expect a gentle downward trend in lending through to the end of the year.'

The figures chimed with a separate report from the Council of Mortgage Lenders which showed gross mortgage lending of £25.3bn in September against £25.9bn a year earlier - the first year-on-year drop in four years.

CML director-general Michael Coogan said: 'All the latest lending data reinforces evidence the expected slowdown in the housing market is materialising.'

Meanwhile, the minutes of the MPC's latest meeting revealed the nine-strong committee, led by Bank Governor Mervyn King, did not discuss raising rates this month.

Voting unanimously to keep the base rate at 4.75%, the MPC noted output growth in the third quarter was weaker than expected, activity and inflation in the housing market were easing and inflation had fallen further below target.

'While the impact of the latest data on output and demand would probably be on the downside in the near term, financial market developments, and in particular the fall in the exchange rate, would be supportive,' the minutes said, adding that next month's Inflation Report would allow the MPC to weigh these developments.

Economist Daragh Maher at Calyon said: 'The minutes must have quelled any lingering hopes among market hawks for a rate hike at the November meeting.'

James Knightley at ING Financial Markets said: 'It appears the Bank is prepared to raise rates again if necessary, but we feel it unlikely that any further action will be taken this year.'

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